How Does a Country’s Debt Affect its Citizens?
Currently my country, Philippines, has tons of debt and it keeps increasing every year.
There’d be stats like, each Filipino has 120k php (around 2.3k usd) of debt. But of course the individual doesn’t directly pay for the debt but rather supposedly taken from the taxes we pay.
So how does it actually work?
Either by reducing the amount of money going towards public services like road maintenance, health care, emergency services, and consumer protection agencies so more money can go to paying off the debt.
Or Alternatively a government can increase taxes or levys to pay the debt but most tax increases will effect the lower and working classes meaning there will be less money a person can spend, and businesses will pass the cost onto consumers to pay the new government levy.
The citizens are indirectly affected because public services funds are reduced and/or taxes are increased. I understand now, thank you.
If that comforts you, the debt per capita index is pretty much meaningless without any other external factorSwitzerland has one of the worst debt per capita and isn’t a poor country by any means.
Still vague to me. Care to explain on the external factors that make it meaningful?
Tbh more or less matters on an intra-country scale, as US could borrow a shitload anytime and pretty much everyone would be happy to take that investment. Investing in the Philippines is much less attractive, and so gives them less spending power
ok, so. the way I see it the same as in investment. As long the debts can create revenues, you can pile up more debts.
That’s the way I see it as well. And probably why we don’t see that metric often. GDP is more an accurate indicator of financial stability / purchasing power (although also flawed)
Ok, so the idea that “government debt is the debt of the citizens” is not entirely true.
In general government takes on debt if it’s planned spending is bigger than its revenue.
There are many reasons for that phenomenon, the main being, that the government undertakes many programmes (for example social security) that it needs to pay for, as well as the cost of its operations etc. being bigger than the profits from those operations.
There are two types of govt debt - external (owed to foreigners) and internal - owed to its own citizens (which is why saying that each individual citizen “owes” some amount of govt debt is inaccurate). The latter is mostly in the form of govt bonds and loans from national banks.
There are two main impacts of govt debt:
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High debt can cause an increase in interest rates, which will lead to a fall in private investment (which is a component of GDP, and translates to future economic growth i.e. high debt --> high interest rates --> lower investment --> slower growth)
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And obvious one is the risk of a sovereign debt crisis like in Greece, when the government is unable to repay its debt, leading to an economic crisis, collapse of the economy, IMF loans and all that “good stuff”. That is an extreme situation, and usually means that the country is in deep shit regardless of debt.
There are also tangentially related risks.
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Inflation - One might ask “Why not issue more money to pay off the debt?” Inflation is the answer why. According to theory, one of the forms of inflation is monetary inflation, when there is so much currency available, that the purchasing power of the currency unit (i.e. $1, 1€ etc.) falls, so prices rise to keep up with the fall.
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The decrease in purchasing power of the currency also means, that foreign currencies become “stronger” in relation to it. That’s good if you’re earning your wages in dollars, but your home currency is falling (since your wages effectively rise in value) but if you’re in the opposite situation it can be a problem.
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Well, if your country has a lot of debt, it has to spend a lot of money maintaining that debt (paying interest off). Ofc, you can always refuse to pay your debt, and nobody can really force you to, but that means no one will lend you money ever unless you pay a massive interest
As usual the world is a complex place. But with a focus on simplicity rather than accuracy:
Responsibly used debt is a useful tool to grow your economy both today and in the future.
Irresponsible use will buy you something useless today that tomorrow’s tax payer will have to pay for.
Your government may build a bridge to transport goods from one place to another so business can grow and generate more tax longer and a school to educate the kids and a port to sell your stuff to foreigners. You could do this with taxes but if you are to pay for all of that with taxes you’ll have to raise taxes so much that people can’t afford to live for the 5 years it takes before they get the benefits from your projects.
Irresponsible use would be building all of this despite there being no need for it or if you take on more government debt to pay for the maintenance cost year after year. (Running a deficit on maintenance cost for a few years during bad economy can be less bad than raising taxes as long as it’s temporary).
